CPFM Working Capital Management 3 — Questions and Answers
Question 1: The Economic Order Quantity (EOQ) model minimizes the sum of which two costs?
- Purchase cost and tax cost
- Ordering cost and carrying cost (Correct answer)
- Stockout cost and labor cost
- Financing cost and insurance cost
Correct answer: Ordering cost and carrying cost
EOQ identifies the order size that minimizes the combined ordering and carrying (holding) costs.
Question 2: A firm offers credit terms of '2/10, net 30.' What does the '2/10' portion mean?
- 2% interest after 10 days
- A 2% discount if paid within 10 days (Correct answer)
- Payment due in 2 to 10 days
- A 10% penalty after 2 days
Correct answer: A 2% discount if paid within 10 days
'2/10' means the buyer may take a 2% discount if the invoice is paid within 10 days.
Question 3: Which inventory technique aims to minimize inventory by receiving goods only as they are needed in production?
- ABC analysis
- Just-in-time (JIT) (Correct answer)
- Safety stock buffering
- EOQ batching
Correct answer: Just-in-time (JIT)
Just-in-time minimizes inventory levels by synchronizing deliveries with production needs.
Question 4: In ABC inventory analysis, 'A' items are typically:
- Low-value items requiring little control
- High-value items requiring tight control (Correct answer)
- Obsolete items to be written off
- Items with the highest unit count
Correct answer: High-value items requiring tight control
'A' items represent a small number of high-value items that warrant the tightest inventory control.
Question 5: Holding safety stock primarily protects a company against:
- Currency fluctuations
- Demand and lead-time uncertainty causing stockouts (Correct answer)
- Rising interest rates
- Supplier price increases
Correct answer: Demand and lead-time uncertainty causing stockouts
Safety stock is a buffer held to prevent stockouts when demand or supplier lead times are uncertain.
Question 6: If a company increases its days payable outstanding without harming supplier relationships, the effect on its cash conversion cycle is to:
- Lengthen it
- Shorten it (Correct answer)
- Leave it unchanged
- Make it undefined
Correct answer: Shorten it
Taking longer to pay suppliers (higher DPO) reduces the cash conversion cycle, all else equal.
Question 7: The annualized cost of forgoing a '2/10, net 30' discount is approximately what (using the standard 360-day approximation)?
- 2%
- About 37% (Correct answer)
- About 12%
- About 73%
Correct answer: About 37%
Cost ≈ (2/98) × (360/20) ≈ 37%, making it expensive to forgo the discount.
CPFM Working Capital Management 3
The Economic Order Quantity (EOQ) model minimizes the sum of which two costs?